DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 301

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations and removal of temporary regulations.

SUMMARY:

This document contains final regulations regarding administrative
review procedures for certain government agencies and other authorized
recipients of returns or return information whose receipt of returns
and return information may be suspended or terminated because they
do not maintain proper safeguards. The regulations provide guidance
to responsible IRS personnel and authorized recipients as to these
administrative procedures.

DATES:

Effective Date: These regulations are effective
on February 11, 2009.

Applicability Date: These regulations apply
to all authorized recipients of returns and return information that
are subject to the safeguard requirements set forth in section 6103(p)(4)
on or after February 11, 2009.

FOR FURTHER INFORMATION CONTACT:

Wendy L. Kribell, (202) 622-4570 (not a toll-free number).

Background

This document contains final regulations amending the Procedure
and Administration Regulations (26 CFR Part 301) under section 6103(p)(4),
(p)(7), and (q) of the Internal Revenue Code (Code). Section 6103
protects returns and return information from disclosure except to
certain government agencies and other authorized recipients, including
State tax agencies as provided in section 6103(d). Section 6103(p)(4)
provides that certain authorized recipients must establish procedures
satisfactory to the IRS for safeguarding the returns and return information.
The IRS reviews, on a regular basis, safeguards established by these
authorized recipients. If the IRS determines that an authorized recipient
has failed to maintain adequate safeguards or has made any unauthorized
inspections or disclosures of returns or return information, section
6103(p)(4) authorizes the IRS to terminate or suspend disclosure of
returns and return information to the authorized recipient until the
IRS is satisfied that adequate steps have been taken to ensure adequate
safeguards or prevent additional unauthorized inspections or disclosures.

Section 6103(p)(7) requires the Secretary to prescribe regulations
providing for administrative review of an IRS determination that a
State tax agency has failed to meet the safeguarding requirements.
Former §301.6103(p)(7)-1 contained procedures to allow State
tax agencies, prior to a suspension or termination of disclosure,
to appeal a preliminary finding by the IRS of inadequate safeguards
or unauthorized disclosure, or to establish that the agency had taken
steps to prevent a recurrence of the violation. Section 6103(q) further
authorizes the Secretary to prescribe such other regulations as are
necessary to carry out the provisions of section 6103 generally.

On February 24, 2006, the Treasury Department and IRS published
in the Federal Register proposed
regulations (REG-157271-05, 2006-1 C.B. 652 [71 FR 9487]) and temporary
regulations (T.D. 9252, 2006-1 C.B. 633 [71 FR 9449]) to extend the
administrative review procedure for State tax agencies to “any”
authorized recipient specified in section 6103(p)(4), and to include
unauthorized inspection within the IRS’s scope of review (in
addition to inadequate safeguards and unauthorized disclosure). Two
written comments were received, and no public hearing was requested
or held. After consideration of the comments received, the proposed
regulations are adopted as final regulations, and the corresponding
temporary regulations are removed. See §601.601(d)(2)(ii)(b).

Explanation and Summary of Comments

The first commentator suggested that the final regulations expressly
provide that the IRS may give written notice of its intention to terminate
or suspend disclosure via facsimile or electronic mail. This suggestion
was not adopted because nothing in the regulations precludes a written
notice from being delivered electronically. Not specifying the means
by which written notice is conveyed would also afford greater flexibility
in providing notice as other means might evolve.

The second commentator suggested that the proposed regulations
would legalize the misuse of returns and return information and thereby
discourage taxpayers from seeking tax advice. This suggestion is
unwarranted. Section 6103 protects returns and return information
from disclosure except to authorized recipients. Section 6103(p)(4)
requires certain authorized recipients to establish procedures for
safeguarding returns and return information. If the authorized recipient
fails to maintain adequate safeguards or has made any unauthorized
inspections or disclosures, additional disclosures to that recipient
may be suspended or terminated until the IRS is satisfied that adequate
steps have been taken to ensure adequate safeguards or prevent additional
unauthorized inspections or disclosures. Prior to these final regulations,
procedures were available pursuant to section 6103(p)(7) to allow
State tax agencies, prior to a suspension or termination of disclosure,
to appeal a preliminary finding of inadequate safeguards or unauthorized
disclosure, or to establish that the agency had taken steps to prevent
a recurrence of the violation. The purpose of these final regulations
is to extend these administrative review procedures from State tax
agencies to all authorized recipients described in section 6103(p)(4)
and to include a preliminary finding of unauthorized inspection within
the scope of review. The extension of these provisions to all authorized
recipients enhances the protections afforded to returns and return
information.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to these regulations. Because
the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small businesses.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR Part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues
to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 301.6103(p)(4)-1 is added to read as follows:

§301.6103(p)(4)-1 Procedures relating to safeguards
for returns or return information.

For security guidelines and other safeguards for protecting
returns and return information, see guidance published by the Internal
Revenue Service. For procedures for administrative review of a determination
that an authorized recipient has failed to safeguard returns or return
information, see §301.6103(p)(7)-1.

§301.6103(p)(4)-1T [Removed]

Par. 3. Section 301.6103(p)(4)-1T is removed.

Par. 4. Section 301.6103(p)(7)-1 is added to read as follows:

§301.6103(p)(7)-1 Procedures for administrative
review of a determination that an authorized recipient has failed
to safeguard returns or return information.

(a) In general. Notwithstanding any section
of the Internal Revenue Code (Code), the Internal Revenue Service
(IRS) may terminate or suspend disclosure of returns and return information
to any authorized recipient specified in section (p)(4) of section
6103, if the IRS determines that:

(1) The authorized recipient has allowed an unauthorized inspection
or disclosure of returns or return information and that the authorized
recipient has not taken adequate corrective action to prevent the
recurrence of an unauthorized inspection or disclosure; or

(2) The authorized recipient does not satisfactorily maintain
the safeguards prescribed by section 6103(p)(4), and has made no adequate
plan to improve its system to maintain the safeguards satisfactorily.

(b) Notice of IRS’s intention to terminate
or suspend disclosure. Prior to terminating or suspending
authorized disclosures, the IRS will notify the authorized recipient
in writing of the IRS’s preliminary determination and of the
IRS’s intention to discontinue disclosure of returns and return
information to the authorized recipient. Upon so notifying the authorized
recipient, the IRS, if it determines that tax administration otherwise
would be seriously impaired, may suspend further disclosures of returns
and return information to the authorized recipient pending a final
determination by the Commissioner or a Deputy Commissioner described
in paragraph (d)(2) of this section.

(c) Authorized recipient’s right to appeal. An authorized recipient shall have 30 days from the date of receipt
of a notice described in paragraph (b) of this section to appeal the
preliminary determination described in paragraph (b) of this section.
The appeal shall be made directly to the Commissioner.

(d) Procedures for administrative review. (1) To appeal a preliminary determination described in paragraph
(b) of this section, the authorized recipient shall send a written
request for a conference to: Commissioner of Internal Revenue (Attention:
SE:S:CLD:GLD), 1111 Constitution Avenue, NW, Washington, DC 20224.
The request must include a complete description of the authorized
recipient’s present system of safeguarding returns or return
information received by the authorized recipient (and its authorized
contractors or agents, if any). The request must state the reason
or reasons the authorized recipient believes that such system or practice
(including improvements, if any, to such system or practice expected
to be made in the near future) is or will be adequate to safeguard
returns or return information.

(2) Within 45 days of the receipt of the request made in accordance
with the provisions of paragraph (d)(1) of this section, the Commissioner
or Deputy Commissioner personally shall hold a conference with representatives
of the authorized recipient, after which the Commissioner or Deputy
Commissioner shall make a final determination with respect to the
appeal.

(e) Effective/applicability date. This
section applies to all authorized recipients of returns and return
information that are subject to the safeguard requirements set forth
in section 6103(p)(4) on or after February 11, 2009.

§301.6103(p)(7)-1T [Removed]

Par. 5. Section 301.6103(p)(7)-1T is removed.

Linda E. Stiff, Deputy Commissioner for Services and Enforcement.

Approved January 13, 2009.

Eric Solomon, Assistant Secretary of the Treasury (Tax
Policy).

Note

(Filed by the Office of the Federal Register on February 10,
2009, 8:45 a.m., and published in the issue of the Federal Register
for February 11, 2009, 74 F.R. 6829)

Drafting Information

The principal author of these regulations is Wendy L. Kribell,
Office of the Associate Chief Counsel (Procedure & Administration).